When you run a small business, it’s important to be aware of your finances and how well they’re doing at all times. But, that can be difficult to do sometimes, especially if you don’t have a lot of experience with it. 

So where can you start? No worries, we’ve got you covered. 

This guide covers how to tell if a company is doing well financially, including:

  • Why knowing your financial position is important
  • How to measure your company’s financial health
  • A checklist for assessing your financial health
  • A tool for analysing your business finances

Why knowing your financial position is important

Spending more money than you make will likely lead to business failure. 

But if you’re aware of your finances, you could spot any red flags that could lead to trouble before it’s too late. 

Dropping profits or rising expenses can signal a need for adjustment to improve your money. From there, it’s easy to make a plan to increase your sales and cut costs. 

In other words, checking in with your financial position can save your business

How to tell if a company is doing well financially 

It’s vital to know how your finances are doing. But how can you, and where should you start? 

There’s not one magical number that determines if your company is doing well financially. A variety of elements provide a complete picture. Let’s go over the main things to look at. 

What you earn 

Revenue

By looking at your revenue, you can see the total amount of cash you bring into your business before expenses. So, if you bring in a lot of money, that can be a good sign

Profit

On the other hand, your profit is the money you retain after subtracting expenses from your revenue. Say you earn £5,000 one month in revenue but spend £3,000. Here, that leaves a £2,000 profit. 

This number is essential for determining if you spend more than you earn. 

If your revenue is high but your profit low, you may be spending too much money on your business. Here, to do better financially, you may want to cut down expenses to retain more profit.  

Earning trends 

While you look at your revenue and profit, determine whether these numbers are increasing, decreasing, or staying the same

Say you notice your revenue has decreased by 10% in the last year. You may still be profitable, but this downward turn can signal future money troubles

Looking at these numbers over time shows when to focus on different sales tactics or look at new income opportunities. 

What you spend 

The amount of money you spend on your business is another key indicator of how well you’re doing financially. Significant expenses that lead to low profits can cause waste and weaken your monetary health.

There are a few types of business expenses, including: 

  • Fixed expenses – ongoing expenses that typically stay the same. 
  • Variable expenses – ongoing expenses that regularly fluctuate in cost. 
  • Periodic expenses – less frequent expenses that only occur as needed. 

Adding up your total expenses and looking at them in detail will help you see which costs you can cut down on. If you notice a lot of wasteful spending, that might suggest your finances aren’t as strong as they could be.

Also, look at how your expenses have changed over time. If they’re growing, compare them to your profit growth to see if it balances out. 

See also: 6 proven ways to reduce business expenses. 

Your cash flow 

Your cash flow refers to the actual cash coming in and out of your business over time. This is separate from your profits, but sometimes it takes time to turn sales into cash. 

When you invoice clients for completed work, they may not pay you right away. So, if you track the actual numbers in your accounts, you can understand how efficiently you turn earnings into cash. 

Your cash flow can also show you how well you cover business expenses. If you struggle to pay regular costs because you don’t have the cash, that can signify financial weakness. 

Your assets and liabilities 

Your current assets and liabilities also impact your financial health. These are the things you own for your business that you could convert into cash and the things you owe other people

For example, you may have equipment, supplies, copyrights, or patents that add up in value. On the other hand, outstanding debts like loans can decrease your company’s value.

A checklist for checking your company’s financial position

Now that you know what to look at to tell if your company is doing well financially, you may wonder where to get started. 

Here’s a checklist that breaks down what to look at: 

  • Your cash balance – how much money you currently have in cash.
  • Your cash flow – check your cash flow statement
  • Your total business expenses – check your balance sheet
  • Your net revenue – what you brought in over a month, quarter, and year.
  • Accounts payable – outstanding money your business owes. 
  • Accounts receivable – outstanding money people owe your business. 
  • Your net profit, gross profit, and profit margin  – check your income statement
  • Your total liabilities – everything you owe others. 
  • Your solvency – your ability to pay off any debts you have. 
  • Your total assets – everything you own for your business that has value.
  • Your liquidation value – the total value of your convertible assets.

Improve your business finances for a better future  

Once you know how to tell if your company is doing well financially, you may want to adjust for a better position. We’ve got plenty of articles to help you organise and improve your finances.

You may want to check out:

Track your business finances with Countingup 

It’s much easier to track your money with the right tools, like Countingup. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for thousands of self-employed people across the UK. 

With the app, you can better understand your money with:

  • Automatic expense categorisation.
  • Ongoing cash flow insights. 
  • Year-round tax estimates.
  • Invoicing on the go. 

Save yourself hours of accounting admin so you can focus on growing your business. 

Start your three-month free trial today. 

Apply now.